Rabo: Skip-Go?

• US inflation continues to cool

• US core inflation has continued its six-month trend of essentially moving sideways

Market comments

Even as the inflation crisis appears to be ebbing, markets remain highly sensitive to the narrative-shaping US CPI reports. The good news conveyed by yesterday’s edition is that US inflation continues to cool, as expected prior to the release. With a 0.1% m/m and a 4.0% y/y increase, which is the slowest pace since March 2021, the headline print was more or less in line with these expectations. Many of the 'one-off' price spikes of this inflation wave, such as in energy, food, used cars, or rent in new leases, are receding in the rear-view mirror and dropping out of the relevant comparison bases. Further deceleration is in the offing too, unless the June 2023 headline CPI number somehow surpasses the +1.2% m/m of June 2022. It suggests there is a good chance that inflation falls to a 3% y/y or an even lower rate next month before this tailwind dies down.

However, US core inflation has continued its six-month trend of essentially moving sideways, with monthly prints of around 0.4% or an annualized rate of 5%.There are, of course, numerous ways to slice and dice these data to fit a particular(more dovish)narrative. For example, one could exclude rents and consider only new leases or remove the prices of used cars from the index to create more palatable core inflation figures. However, a ‘standard’ core inflation of around 5% is simply inconsistent with a medium-term inflation rate of 2%. Despite these underlying improvements, which have occurred even with unemployment remaining near historic lows, this lack of indisputable progress will still concern the hawks on the FOMC.